Understanding the Power of Bank Drafts: Secure Your Large Payments
A bank draft is a payment method like a check, where the amount is guaranteed by the issuing bank. Funds are drawn from the payer’s account and placed in the bank’s reserve account until cashed by the payee. This makes bank drafts more secure than personal checks for the recipient.
Key Takeaways
- A bank draft ensures payment is guaranteed by the issuing bank.
- Typically used for substantial payments such as home down payments.
- Funds are verified and withdrawn from the payer’s account and held in the bank’s reserve account.
- Banks generally charge a fee for issuing a bank draft.
- Sellers often require a bank draft if there’s no established relationship with the buyer.
How Does a Bank Draft Work?
Several secure payment options are available, including certified checks, wire transfers, and bank drafts. These options ensure the payee receives the funds because they are guaranteed.
Bank drafts, also known as banker’s drafts or teller’s checks, are guaranteed by the issuing bank, typically for significant amounts. Examples include major purchases like property down payments.
When requesting a bank draft, the bank verifies sufficient funds in your account, withdraws the amount, and moves it to their reserve account. The draft is then prepared with your details and specified amount for the payee. It includes a serial number, watermarks, and may feature micro-encoding for authenticity.
Note: Since funds are withdrawn from your account when you purchase the draft, the issuing bank essentially becomes the payer.
Bank drafts may be required in transactions involving large sums or when sellers aren’t familiar with buyers. Typically, banks charge for issuing drafts, often waiving the fees for trusted customers or high-net-worth individuals.
Cancelling a Bank Draft
Banks often do not place stop payments on drafts once issued, as the transaction is recorded. To reverse it, banks usually need the draft redeemed for its full amount. Cancellation or replacement of lost drafts is possible with proper documentation.
Bank Drafts vs. Money Orders
Both bank drafts and money orders are secure, guaranteed payment methods avoiding the need to carry large sums of cash.
- Bank Drafts: Check drawn on a bank’s funds, available only at financial institutions like banks or credit unions.
- Money Orders: Purchased with cash or a debit card, available at certified stores, post offices, and banks. They have purchase limits and can be used for domestic and international transactions.
Bank draft amounts can be higher than money orders, reflecting the additional steps and charges banks apply.
Bank Drafts vs. Certified Checks
- Bank Drafts: Funds withdrawn and held by the bank immediately; the bank guarantees the amount.
- Certified Checks: Funds guaranteed by the bank, but not withdrawn until cashed; funds are on hold in your account.
How Do You Cancel a Bank Draft?
Once a bank draft is in the recipient’s possession, it cannot be canceled. If lost, retrieval would usually require steps like providing a surety bond or signing an indemnity form for a replacement.
Cost of a Bank Draft
Fees for bank drafts vary by institution, sometimes a flat fee or a percentage of the draft amount. Charges can be waived for customers with strong banking relationships.
The Bottom Line
While not practical for everyday use, bank drafts are invaluable for significant purchases where security is key. Sellers may require them to ensure receipt of funds, making them a vital payment method for transactions like car or home purchases. Successfully obtaining a bank draft from your bank involves understanding its costs and processing.
Related Terms: certified check, money order, banker’s draft, stop payment, high-net-worth individual.
References
- Royal Bank of Canada. “What Is a Bank Draft?”
- U.S. Post Office. “Sending Money Orders”.
- Corporate Finance Institute. “Bank Draft”.
- U.S. Post Office. “Money Orders - The Basics”.
- National Bank of Canada. “What Is a Bank Draft?”
- TD Bank. “How Do Bank Drafts Work?”
